Sunday, 12 June 2011

Inflation Targeting Turns 20

Scott Roger writes in Finance and Development (March 2010, Volume 47, Number 1) that Inflation Targeting Turns 20. In the last 20 years a growing number of countries have been making a specific inflation rate the primary goal of monetary policy, with success. Roger writes,

TWO decades ago, New Zealand adopted a new approach to monetary policy, based on achieving a specific target for inflation. What made this approach new was the explicit public commitment to controlling inflation as the primary policy objective and the emphasis on policy transparency and accountability.

Today 26 countries use inflation targeting, about half of them emerging market or low-income economies. Moreover, a number of central banks in more advanced economies—including the European Central Bank, the U.S. Federal Reserve, the Bank of Japan, and the Swiss National Bank—have adopted many of the main elements of inflation targeting, and several others are in the process of moving toward it.

This article examines how inflation targeters have performed over the past 20 years—including during the commodity price shocks of 2006–08 and the global financial crisis that began in 2007. The article also highlights some especially important issues inflation targeters are likely to face in the next few years.

This is one example where New Zealand lead the world in economic policy.